MPP Rhode Island Report

price-based taxes suffer from two problems. First, the price of legal marijuana will likely continue to fall as the market becomes more efficient and production costs decline. Revenue from a price-based tax will thus fluctuate with price, meaning that it will likely decline over time. If states are looking to marijuana taxes for a consistent revenue stream to fund other programs, taxing the price of marijuana is not necessarily a dependable way to do that. The second problem Oglesby identifies is “phony pricing,” such as product bundling. Product bundling could, for example, involve a retailer selling a marijuana pipe for much more than it’s worth and including marijuana as a free “gift” alongside, effectively avoiding the marijuana tax. He warns that states with price-based taxes should be sure to include language in their legalization law that prohibits this kind of tax evasion. Price-based taxes are also vulnerable to other tactics (some of them legitimate) such as employee discounts and quantity discounts.

From a pragmatic perspective, Mr. Oglesby recommends a weight-based tax to avoid the problems associated with taxes on price. Taxing weight will provide more consistent revenue streams to the state and prevent the problem of product bundling. However, taxing by product weight comes with other consequences, primarily in the form of additional administrative resources necessary to collect revenue, since the weight must be accurately tracked and measured before sales. A weight-based tax also tends to incentive producers to make higher potency products. This can be partially addressed by taxing different kinds of marijuana products with varying levels of potency (e.g. flower, trim, concentrates, etc.) at different rates, similarly to how alcohol products are categorized based on potency (e.g. beer, wine, and liquor). If and when interstate commerce for marijuana is allowed, states with weight-based taxes will need to reconsider this approach, since, for example, no distributor would buy marijuana from Rhode Island producers if it were subject to a $50 per ounce tax while marijuana from another state is not taxed.

A third proposal that has some support but has not yet been implemented is taxing marijuana by its potency, i.e. its THC content.12 Some believe a potency tax could decrease the incentive to sell more potent products. The problem with this option is that the process and technology involved in testing the potency of marijuana products are subject to significant variance, depending on what parts of the plants are tested and so on. Assigning a tax to potency may tempt some producers to err on the side of testing that shows lower potency.

In addition to taxes, states with legal marijuana also collect license fees from marijuana businesses, which can be used to cover regulatory costs and free up tax revenue for other purposes. These fees often vary depending on the size and nature of the business.